Suit on Orange County Bailout Is Rejected

A Los Angeles County judge Thursday tossed out a lawsuit challenging the constitutionality of Orange County’s bankruptcy bailout, easing fears of the Wall Street investment community that nearly $900 million in county recovery bonds might not be repaid.

Superior Court Judge Daniel Solis Pratt rejected the claims of an Orange County watchdog group that the annual diversion of $50 million in county revenues to repay the bonds violated a reform written into the California Constitution in 1878 after a series of fiscal calamities in the state.

Pratt’s ruling was the polar opposite of a decision late last year by a fellow Los Angeles County judge, who held that a nearly identical diversion of $50 million in transportation funds to bail out Los Angeles County’s teetering public hospitals was unconstitutional.

“We’re pleased with the decision and it is, of course, very important to Orange County’s recovery and ought to be influential in improving the county’s credit and bond ratings,” said Bruce Bennett, the county’s lead bankruptcy attorney, who argued the case before Pratt.

Richard I. Fine, the Century City attorney who filed the lawsuit on behalf of the Committees of Correspondence, said he would immediately appeal Pratt’s ruling.

“When you get into these political situations, sometimes the judicial system fails, and it did here,” Fine said.

Wall Street analysts, who said the case was being closely followed because it could unravel the bankruptcy recovery plan, found comfort in the ruling. They said it would provide a stout boost to the recovery of a county still struggling to improve a bankruptcy-battered investment rating that prevents it from borrowing money at the best available rates.

“This lawsuit was the biggest cloud looming ominously over the county,” said David Brodsly, vice president of Moody Investment Service. “It was certainly an issue we were concerned about. I think it bodes well for the county’s future.”

County Chief Executive Officer Jan Mittermeier said the decision is “going to help get us where we want to go, which is an investment-grade rating.”

Fine said, “It shows this to be a political decision, since there is no way any objective judge could make such a ruling before a trial.”

Fine successfully challenged on identical legal grounds the transfer of $50 million in Metropolitan Transportation Authority funds to Los Angeles County’s health care system.

In that case, brought by Raymond Veltman, a retired Brentwood trucking company owner, Superior Court Judge Richard C. Hubbell ruled that special-purpose legislation to transfer the MTA money was unconstitutional because it was “a special statute for the benefit only of Los Angeles County.” The constitutional amendment adopted after the 1878 financial scandals says broadly that special-purpose legislation may not be enacted to achieve ends obtainable under general law.

Los Angeles County’s appeal of Hubbell’s decision is pending.

To emerge from the largest municipal bankruptcy in history, Orange County fought for the passage of a series of special-purpose bills permitting the transfer of $38 million a year for 15 years of transportation funds and another $12 million a year for 20 years of money previously earmarked for redevelopment, flood control and recreational uses.

That $50-million annual diversion was set aside to repay $880 million in county borrowings.

William G. Steiner, chairman of the Orange County Board of Supervisors, said: “This decision was very important for the county, because it means our credit-worthiness is no longer in jeopardy.” He said that during a recent visit to investment firms in New York, Chicago and Boston, “this case was on everyone’s minds.”

Supervisor Jim Silva said he hoped the decision would end any uncertainty about the county’s bankruptcy recovery plan.

“I think this shows that the county is on the right course,” Silva said.

Bill Ward, a member of the Committees of Correspondence, said the group has no intention of abandoning its challenge.

“We are not going to back down. We are going to fight,” Ward said.

Even if the case is appealed, Bennett said he expects the bankruptcy recovery plan to be upheld.

“We do not believe that any appellate court will view this case differently,” Bennett said.